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ASIA The ‘Rim of Fire’countries are burning with promise, but . . .

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In the shadow of China, Southeast Asian countries such as Indonesia and the Philippines sometimes get overlooked in assessments of the global metal markets. But with raw material supplies likely to tighten in the coming years, the two nations are likely to play an increasingly significant role.

The countries, situated along the geologically active "Rim of Fire," are rich in mineral resources.

While relatively unfamiliar to many in the west, Indonesia—a massive archipelago that stretches for more than 3,000 miles from the Pacific Ocean to the Indian Ocean—has a population almost equal to that of the United States. It also is thought to have some of the world's biggest untapped sources of raw materials, although no one's entirely sure what it contains—a recent scientific expedition to an area in the far east of the country discovered what researchers called an "Eden" of previously unknown species.

For mining companies as well as naturalists, Indonesia is one of the world's last frontiers, and sustained high commodity prices are now making it economical for companies to push into areas that were previously off limits.

The Philippines might be slightly less endowed with natural resources, but it has been attracting even more attention in recent years after the supreme court in Manila in late 2004 lifted a long-standing ban on foreign companies taking full ownership of mining projects. According to some estimates, the Philippines might have as much as 25 percent of the world's remaining nickel reserves and substantial amounts of copper and gold. Given this, the government's aim to attract at least $8 billion in foreign investment by 2011 doesn't seem unreasonable.

Indonesia wants to attract foreign money, too. But both countries have run into problems convincing overseas companies that they can provide a sustainable investment climate.

In the Philippines, the supreme court decision to allow large-scale foreign investment sparked a wave of protests from environmental and social groups and the Catholic Church, which is a hugely powerful force in the country. The opposition focused mainly on the Rapu Rapu base metals mine, owned by Australia's Lafayette Mining Ltd., which was closed in 2005 after a toxic spill polluted a nearby river, and plans to reopen it met with fierce resistance. The controversy became a test case for how serious the government was about allowing foreign investment. While Rapu Rapu is now operating, the struggles it had to undergo in order to reach production—including sometimes-violent protests and allegations of sabotage—seem unlikely to put new investors' minds at rest.

A test case of a different kind has been troubling mining companies with operations in Indonesia. Last year, a top executive at the local arm of Denver-based Newmont Mining Corp. was put on trial for the company's alleged pollution of a bay near one of its mines. The executive, Richard Ness, was cleared after a lengthy trial, although prosecutors are appealing the verdict. Whatever the final outcome, the sight of a company executive being held personally responsible for alleged pollution in a foreign court has understandably worried some prospective investors.

This doesn't mean that investment has dried up, and some of the world's biggest mining houses have plans in the region. Rio Tinto Plc is in talks to build a $2-billion nickel project in central Indonesia, while Xstrata Plc is conducting feasibility studies on the Tampakan project in the Philippines that it said could contain more than 11 million tonnes of copper.

However, the unstable political environment—both countries are rife with corruption allegations and also face low-level insurgencies from Islamic extremists—continues to be a concern.

Perhaps more significantly for metal prices in the short term, there also are continuing questions about the reliability of raw material exports from the region.

Indonesia in particular is a key supplier to the nonferrous market, and supply disruptions have been mounting. The troubled province of West Papua is home to Freeport-McMoRan Copper & Gold Inc.'s giant Grasberg copper and gold mine, which has faced on-and-off strikes for several years.

Problems also have emerged in the country's tin industry. Last year, the government launched a crackdown on small-scale, privately owned tin smelters who it accused of operating without licenses and not paying royalties. Indonesia is the world's second-largest tin producer after China and the disruption to exports, which is still continuing, helped send tin prices to record highs on the London Metal Exchange.

And in August, Indonesia's role as a major bauxite supplier came into focus when it halted output at one of the country's two main production bases, again throwing into question the security of supply of a key raw material.

The reasons for the supply disruptions vary, from local politics to problems with operating permits. However, the government also has plans that could have a longer-term impact it wants to switch from being primarily an exporter of raw materials to a producer of "value-added" products—in other words, it wants foreign companies to invest rather than just buy its exports.

According to local reports, United Co. Rusal (UC Rusal) plans to team up with Indonesian bauxite producer PT Aneka Tambang Tbk (Antam) to build a smelter in the kind of deal that may become more and more common in coming years.

But as well as providing an investment opportunity for international companies, the government's policy also raises the prospect of a fall in supply of raw materials to the market. Geographical realities mean that China may be affected more than other market by any sustained decline in supply, but as the past few years have clearly shown it doesn't take long before China's problems become those of the wider world.

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